Betting On Consumer ETFs

March 08, 2012



Here’s a peek at the performance of these same four-largest consumer cyclicals funds in the 12 months ended March 1.

Consumer cyclicals - 1 year

FXD, shown in dark blue, stands out for higher volatility, as well as lower return. FXD returned 10.9 percent; versus 14.5 percent for XLY; 14.2 percent for the Vanguard Consumer Discretionary ETF (NYSEArca: VCR); and 13.7 percent for IYC.

FXD’s results make sense given that it tends to hold much smaller stocks than does XLY. (Small-cap stocks tend to have higher beta than large-cap stocks.) Bloomberg data show an average market cap of $14.4 billion for FXD compared with $41.5 billion for XLY.

Over a three-year period ended on March 1 of this year, fund performance diverges more dramatically:

Consumer cyclicals - 3 years

As it happens, a three-year look-back coincides closely with the bottom point of the broad market following the financial crisis.

FXD has screamed back from this low point, albeit with a wild ride along the way. That’s consistent with the idea that FXD has higher beta than its peers.

Conversely, both charts suggest IYC has lower beta than other sector funds.

To be clear, I expect all four of these consumer cyclical funds to have higher beta than SPY. The point is that each fund parks itself on a different part of the risk/return spectrum.

These funds diverge on fees as well, with FXD charging the most by far at 0.70 percent and IYC next highest at 0.47 percent. XLY and VCR are far cheaper at 0.18 percent and 0.19 percent, respectively.

So, if you’re inclined to follow the money, or if you believe the economy really is growing and don’t want more Apple in your cart, consumer cyclical ETFs offer a viable alternative.

Of the four funds I touched on here, I happen to like XLY for its low cost and middle-of-the-road risk level, relatively speaking. For a list of all eight funds in the sector, use our IndexUniverse ECS fund finder.


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